The 8 Most Promising Types of Businesses for Start-Ups

By The Fiscal Times  FEB 19, 2013 5:05 PM

Not surprisingly, the hottest industries of 2013 are all somehow connected to tech.

 


Thinking of taking the entrepreneurial leap this year in an industry that would pay off?  IBISWorld's recent list of eight hot industries for start-ups is a good place to begin your research.

What do these eight industries have in common? “Each is fragmented, has low barriers to entry, and each offers strong revenue growth,” says Kevin Boyland, an IBISWorld analyst. “Strong growth in a fragmented industry indicates growing demand in a market in which no one player has a significant foothold. Because barriers to entry are low, a start-up has the potential to capture a share of this growing market.”

One major advantage in 2013 is buying and selling goods online. This option allows small firms to compete on a national level with little additional effort.

Boyland says 2013 could be a good year for startups because we’re moving farther away from the recession and the political uncertainty that followed the presidential election, allowing for a more predictable business environment. If entrepreneurs wait too long, they could miss the window for breaking into these industries.

Where might the best opportunities lie?

Cloud Services

Also called “virtual data rooms,” cloud services are growing quickly, with industry revenue expected to hit $728 million this year, a 16%  increase from 2012. The industry has seen an annualized growth rate of 15.8% since 2008. Fueling the growth is the global push toward online services. The growth of access-limited document sharing infrastructures – and programmers – has enabled the industry to flourish without huge investments, notes IBISWorld. As the number of new enterprises increases, industry revenue is forecast to grow at an annualized rate of 14.2% over five years. “The amount of data being collected by humans and machines is growing exponentially,” says Neal. “Startups are rushing to find solutions to capitalize on this.”

Online Travel Agencies

Overall, the travel agency industry hasn’t fared well during the recession, but IBISWorld estimates revenue among online agencies grew at an average rate of 3.9% over the past five years, and expects revenue to grow another 6.1% in 2013. Storefront travel agencies are being replaced by online services, which offer a relatively high-profit, low-cost way to handle transactions.

But major operators have been acquiring global, regional and local websites to improve revenue and capture a larger market share, which presents both a risk and an opportunity for start-ups. As major operators grow through economies of scale, competition and barriers to entry in the industry increase. On the other hand, new entrants that have a successful site can leverage their success to secure an attractive deal with a larger firm. While IBISWorld expects industry growth in the next five years, they forecast an annualized rate of only 2.2%.

Social Network Game Development

This industry has grown 184.3% per year on average over the past five years, driven by internet traffic and social networks, especially Facebook (NASDAQ:FB).  As broadband-enabled smart phones and tablets have proliferated, consumers have also increasingly been able to access social networks 24/7, placing gaming within reach for most computer users.  Revenue is expected to grow 31.9% to $6 billion in 2013 according to IBISWorld. The Entertainment Software Association helps new entrants by providing market research to the most in demand products. One caveat, says Doug Neal of the Center for Entrepreneurship at the University of Michigan: Social gaming is “extremely competitive and saturated.” Ronald Goettler, a professor of entrepreneurship at the Simon School of Business at Rochester University, recommends that firms first develop low cost versions to test their concepts. 

IT Security Consulting

With data security breaches in the headlines, this industry is on steroids. In the past five years, IBISWorld says revenue in this industry increased at an annualized rate of 9.8% to $5.3 billion and projects it will grow 8% each year over the next five years.

Goettler at Rochester University offers a key consideration: “Reputation is critical, which creates a bootstrapping problem for start-ups. Entrants [may] find themselves having to offer their services at lower prices relative to established IT firms until they build a solid reputation." Online Shoe Sales

This industry has grown 16.2% over five years to $8.9 billion in 2013.  Each year, more than 100 million Americans buy goods from the online retail marketplace, and clothing, accessories and shoes are the second largest category of items after books. IBISWorld estimates industry revenue will increase at an average 10.2% over five years.

Amazon (NASDAQ:AMZN) and Foot Locker (NYSE:FL) control less than 16% of this market. “Online shoe retailers were the most surprising on the list. The industry has a lower level of concentration” than might have been thought, says Boyland of IBISWorld. Meanwhile, online-only retailers like Zappos, warns Goettler, will need to ensure consumers can return their products inexpensively and conveniently. Neal worries that this industry has already peaked.

Digital Forensic Services

If your IT security fails, a digital forensics service comes in to investigate. These services help solve crimes committed with or on computers, such as phishing, bank fraud, and money laundering. In the last five years, IBISWorld says revenue for this industry increased at an annualized rate of 11.9% to $976.2 million. As consumers spend more time online, the amount of electronically stored information (ESI) will rise exponentially.

There are obstacles. Capital intensity and the rate of technological change are high, so prospective firms have to secure substantial backing to enter successfully. Industry participants will be challenged by the expansion of cloud computing, which allows information to be manipulated, stored and processed from multiple computers. Still, revenue is likely to continue to climb at the rate of 9.1% over the next five years.

Translation Services

The growth of the global market has benefited this industry. Industry revenue has increased at a rate of 2.4% in the past five years to $3.2 billion in 2013. The Internet has been instrumental in increasing demand for translators as businesses expand into new countries and require services to adapt websites and marketing materials to the new region. Industry revenue may increase 3.4% in 2013, though IBISWorld points to some challenges. Translation services remain relatively labor intensive, and some competition exists through software programs and free internet websites (though most fail to provide cultural context).

TV & Home Theater Instillation Services

IBISWorld says this industry is highly fragmented and has a very low level of capital intensity, affording firms with transportation and proper tools good opportunity. About 98% of today's US households have at least one TV, 84% have a DVD player or recorder, and 25% have a home theater, according to the Consumer Electronics Association. Revenue is growing an annualized 4.1% to $12.2 billion over the five years to 2013.

But cable subscriptions are falling – one report says paid subscriptions will be down 6% by 2017. To succeed, start-ups must keep up with the rapid pace of technology. “One concern with theater installation services is the difficulty of identifying and reaching consumers without paying significant commissions or referral fees to consumer electronics retailers,” says Goettler.

Editor's Note: This article by Sheryl Nance-Nash originally appeared on The Fiscal Times.

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